“Just by becoming mediocre, Citi stock can double in 4 years,”
CLSA analyst Mike Mayo told Business Insider.
He reasoned that the stock should be able to make that gain no matter who’s running the company.
This, ladies and gentleman, is optimism.
On Thursday, Citi revised down its Q3 earnings after a $ 600 million addition to its legal reserves. But in a note on Friday Mayo argued that the bank is only using 2% of the cash it could use for its legal cushion.
So the question isn’t whether or not the bank has enough cash.
The question is whether that $ 600 million number is liberal or conservative. Is management giving the bank enough room to handle legal costs stemming from the financial crisis, impropriety at its Mexican subsidiary Banamex, the Libor exchange rate scandal and more?
Or will we keep seeing Citigroup’s name in the media for this kind of activity over and over, concerning stockholders?
“Taken collectively Citi is a poster child of the problems in banking for the last 4 decades,” said Mayo, “But what I like is they’re not trying to be the next G-whiz growth stock. Now does that mean they still need to clean up from what they had, yes…”
But the cleanup, as long as the bank is able to pass its stress test in March, shouldn’t be G-whiz stuff either.
“Citi stock should double over four years merely by moving back to average,” Mayo wrote in his note. “It should improve efficiency back to historical and peer levels, redeploy capital aided by big tax benefits, run-off legacy assets and pursue “restructuring by a 1,000 cuts.” This should lead to greater stability and an increase in ROA by half (to 1.2%). This thesis fell short for the past year, partly given the failed Fed stress test, but the math still works, especially with higher capital.”
That said, if the bank doesn’t pass its stress test in March, “heads will roll,” he told Business Insider.